Mark McCormick on Competing Currencies Outgrowing the US Dollar

Shifting Global Economic Landscape

• 💡 Tariffs initially expected to strengthen the US dollar, but this did not materialize as anticipated.
• 📌 A significant factor is Germany's decision to scrap its debt break, enabling 800 billion euros in spending on infrastructure and defense.
• 🚀 Other countries are focusing on fiscal stimulus to boost domestic economies rather than direct retaliatory trade moves.
• 📈 This has led to a rotation from overbought US dollar and assets towards non-US equities, assets, and currencies.

Growth Expectations and Value Trades

• 🎯 Currencies of countries expected to outgrow the US over the next year are seeing significant gains.
• 💰 The current market trend favors value trades in currencies, benefiting undervalued currencies from countries that have maintained low interest rates.

China's Currency Strategy and Internationalization

• ⚠️ A market myth suggests China will let its currency depreciate significantly; however, this contradicts their goals.
• 🏦 Since 2022, emerging markets are trading more amongst themselves, with commodities often settled outside the US dollar, and India settling Russian contracts in gold.
• 🔑 China aims to internationalize the Renminbi (RMB), making significant currency depreciation an unlikely strategy.
• 💬 Allowing the currency to weaken too much can hamper local confidence, suggesting China will use its currency in a measured way to project strength.
• 📈 China is also focused on international capital flows and becoming a net creditor, which requires limiting currency volatility.

Strategic Fiscal Stimulus Over Devaluation

• ⚡ While trade uncertainty will cause shocks, fiscal stimulus is the core strategy for most countries, including China.
• 📊 China is expected to ease monetary policy slightly, leading to minor currency weakening, but not beyond 7.40-7.50.
• 🚀 The transition from monetary to fiscal support, combined with equity market momentum and growth expectations, is the favored playbook over currency devaluation.
• 🏠 China's recent growth struggles have largely stemmed from domestic spending in the housing sector.